Posts Tagged ‘FTB’

Sometimes, Pigs Do Fly (California Repeals FTB’s QSB Tax Grab)

Sunday, October 6th, 2013

I look out the window of my office, and I saw the pig that flies:

A flying pig?

[The Flying Pig is via a Creative Commons license, from Wikipedia. And, no, I didn't see one flying by my office in Las Vegas.]

California Governor Jerry Brown signed legislation “repealing” the Franchise Tax Board’s grab of revenue via the QSB decision. For those who don’t remember, last year a court ruled that California couldn’t discriminate against owners of Qualified Small Business Stock who reinvested the proceeds in a non-California company. So the Franchise Tax Board had ruled that anyone who did this would be subject to back taxes on the proceeds of their QSB stock. It was a decision that had California’s tech community in an uproar.

Kudos to Governor Jerry Brown who officially put the end to the FTB’s tax grab. He signed legislation that through legislation states that entrepreneurs and others who followed the law do not have to pay back taxes, penalties, and interest to California.

So pigs did fly in Sacramento…at least for one day.

When a Day Late Isn’t a Dollar Short

Tuesday, April 16th, 2013

I’m in zombie mode — it’s midnight and the last of the work is done (for a short time). I’ll be out the rest of today (Tuesday). Tax Day is over.

One place where it’s sort of not over is California. The Franchise Tax Board had major computer issues with their website on Monday. The FTB announced that anyone who pays their tax on April 16th via the FTB’s webpay system (for individuals or for businesses) on April 16th will be considered to have made the payments on April 15th.

News From California Regarding QSBS

Thursday, February 28th, 2013

Two pieces of news out of California regarding the Qualified Small Business Stock situation. For those who aren’t aware, a court last year ruled that California couldn’t discriminate against out-of-state Qualified Small Business Stock (QSB). The Franchise Tax Board interpreted that ruling to mean that for any open tax year, the state would challenge the QSB deductions for anyone who took it. For 2012 on, the California deduction was eliminated, so this is an issue impacting entrepreneurs for tax years 2008 through 2011.

The FTB announced today that they will begin sending Notices of Proposed Assessment (NPAs) in early April. The FTB has also established a simplified procedure to protest the NPAs and it’s clearly noted in their FAQ web page on this issue.

(As much as I think the FTB’s implementation of the Cutter decision is wrong, I want to give the FTB kudos to them for an easily understood webpage and instructions on this issue. I also want to thank them, especially Susan Maples (the FTB’s Tax Practitioner Liaison), for reaching out to the tax professional community in communicating the issues.)

Meanwhile, the tech community remains extremely displeased with the FTB’s actions. Brian Overstreet, the man who began sounding the alarm, has set up a new website on this issue. There’s a very anti-California article on that highlights this issue. Legal action is almost a certainty; many of these entrepreneurs have the deep pockets necessary to fight the FTB.

Important Court Ruling for Entities Owned by Californians Located Outside of California

Thursday, February 28th, 2013

Let’s say you have a business entity, Widgets, Inc. It’s a Nevada corporation; the corporation is located in Las Vegas. The business has no operations in California but it is a corporation with one owner who resides in California. However, the owner is not involved with day-to-day business; a manager in Las Vegas runs the business. The only officer of the corporation is a Nevadan, too. Does the corporation owe California taxes?

The Franchise Tax Board has said yes for years. Any business entity which is owned by a Californian is subject to California taxation. Earlier this month a court in Los Angeles said no.

As reported in Forbes, the facts weren’t in dispute, and mirror what I wrote above. Since all the evidence showed the company was in Nevada, run by Nevadans, Nevada was the commercial domicile of the company, not California. The company won.

Now, let’s get to the dark side of the case. The article in Forbes doesn’t mention the years in dispute. Unfortunately, the actual ruling does not appear to be available on the Internet. But I did find a predecessor ruling from the Board of Equalization that’s available. Let’s go through the hoops that Daniel V (the corporation in question) went through. From reading the BOE decision, I found that the years in dispute were 1997 and 1998.

Sometime after 1997 and 1998, the Franchise Tax Board sent notices to the company. The company then fought the notices through the FTB’s appeal process. (The dates on this aren’t available.) After losing at the FTB, the company paid some (probably most) of the taxes and penalties, and filed an appeal to the Board of Equalization. (The Board of Equalization hears appeals from the FTB.) The company lost in May 2008, paid the remaining taxes, penalties, and interest, and asked for a rehearing (that’s what I linked to above). That rehearing happened later (probably in late 2008), and the company lost again (the decision was likely not rendered until 2011). The entity then sued in Superior Court (March of 2011). The case was heard in November 2012. The company won…for now. I fully expect the FTB to appeal the decision (though there are reasons not to).

Consider also the FTB’s mentality. This case did go through the FTB appeals process, and the company lost. As far as the FTB is concerned, any business that can be loosely tied to California owes California taxes…period. The facts of this case definitely make one wonder about how the company lost at both the FTB and BOE. But I digress….

I expect an appeal because the FTB’s litigation strategy has been to appeal almost every case, whether they’re in the right or the wrong (see Gilbert Hyatt). Part of this is the FTB’s litigation strategy: To exhaust individuals thinking of suing the agency. It takes a lot of time and money to sue the FTB.

One reason not to appeal is because this case only stands as precedent for the one company involved. If the FTB appeals and loses, then this case is binding upon the FTB (to all businesses with a similar set of facts).

Finally, consider how long this case has festered. It’s been ten years (at least) and it’s likely still not done. It does take a lot of money to fight the FTB.

Entrepreneur Rant on FTB’s Retroactive QSB Ruling

Tuesday, January 15th, 2013

Back in December, I reported on how the Franchise Tax Board (California’s income tax agency) would interpret the Cutter decision. I didn’t spend much time on it, as the subject of Qualified Small Business stock (QSB) doesn’t impact many of my blog readers. The FTB decided that since the appellate court ruled as aspect of California’s law on sale of QSB stock unconstitutional, one way around the issue was to void the law in its entirety. And send individuals who took the QSB deduction penalty and interest notices. Surprise!

That said, an entrepreneur named Brian Overstreet has written a column that is about as nasty as can be toward the FTB and California. (I recommend reading the entire column.) As Mr. Overstreet notes the impact:

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

Of course, there’s definitely a constitutional issue here, too. Given that some of the impacted entrepreneurs have deep pockets, I expect this ruling to head to court. I suspect the FTB can do this for the current tax year (2012; the ruling was announced in December) but I doubt it will hold up for prior tax years.

The other issue is one any entrepreneur in California should consider. As Mr. Overstreet noted, “Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

FTB and BOE Release List of 500 Biggest Tax Delinquents

Thursday, October 18th, 2012

California’s Franchise Tax Board released its list of the 500 largest income tax delinquents on Tuesday. New to the list is a notation of whether or not the individuals have state licenses. I’m amazed at how many attorneys are on the list. Lawyers, after all, are one of three groups of professionals with full practice rights in front of the IRS. That doesn’t seem to help them here. But I digress….

Leading the list is Halsey Minor, founder of CNET. He filed bankruptcy earlier this year. He’s been on the list for a while, and given the bankruptcy, he’ll likely be on it for some time. He owes the FTB $10.7 million.

There are some celebrities on the list: Dionne Warwick ($2.6 million), Joseph Francis ($819,000), and Steven Seagal ($348,000) were highlighted by Joe Kristan. I also noticed Ronald Isley ($407,000) among the individuals.

Joseph Francis makes a second appearance on the list. His Mantra Films owes $1.2 million (the FTB added officers to the list for business entities which made it easy for me to spot this). In total, Mr. Francis and his businesses owe the FTB more than $2 million.

It took $140,000 in tax debt to make the FTB list.

The Board of Equalization also released its list of the 500 largest sales and use tax delinquents. Leading the list (again) is California Target Enterprises of Downey (owing $18.5 million). The company went bankrupt in 1992, so like Mr. Minor, good luck to the BOE in getting anything from them.

The only celebrity I recognize on the list is Bruce McNall, the former owner of the Los Angeles Kings and former resident of ClubFed (he was convicted of conspiracy and fraud back in the 1990s). Mr. McNall owes $7.8 million to the BOE, and it’s likely that collecting from his will be nearly as difficult as collecting from California Target Enterprises.

It took $436,000 to make the BOE list.

California Doesn’t Conform on Self-Employment Tax Deduction Change

Sunday, March 4th, 2012

Yet another California non-conformity issue has reared its head. Those of us who are self-employed must pay self-employment tax on their self-employment earnings. The self-employed get to deduct 50% of that on line 27 of Form 1040.

In 2011 the self-employment tax changed from 15.3% to 13.3% on the first $106,800. However, the deduction is still based on 15.3% rather than 13.3%. So let’s say I paid $1,000 in self-employment tax; my deduction is $575, not $500. A little extra benefit…except on your California return.

For California purposes, the deduction is $500, not $575–it remains at 50% of the amount paid in self-employment tax. I noticed this with one of my California clients and called the FTB to verify this. The California legislature did not pass conforming legislation. Those of you who are self-employed Californians will see an adjustment on Schedule CA of your Form 540.

This was noted in today’s San Francisco Chronicle
. The Chronicle also noted that TurboTax hadn’t updated its software until last Friday. Apparently, the Franchise Tax Board forgot this adjustment until after the tax forms were initially generated.

Those of you who have filed returns with “material” changes will likely get notices noting the adjustment and proposing an additional amount of tax to pay.

The FTB Would Like Some Help from California Tax Professionals

Thursday, July 28th, 2011

If you’re a tax professional in California, the Franchise Tax Board is asking for some help to improve their website.

We need tax professionals’ help to test webpages and online applications (such as MyFTB Account) and provide feedback to us. If you elect to help us, here’s what to expect:
• Testing generally takes 15 to 30 minutes.
• Sessions vary based on what we test.
• We contact you by email or phone and provide you information about the test.
• We plan to contact you only once or twice a year.
• We will not contact you during April or October.
If you would like to participate or have additional questions, respond to Donna Freeman with the following information at Donna [dot] Freeman [at]

Your name
Your email address
Your daytime phone
Your city

We appreciate your help!

It’s too every tax professional’s benefit to have the FTB website work well, so those of you who have a little extra time (and remember, the FTB will not contact you during April or October) should send Ms. Freeman an email.

At Least, He’s Doing Well…

Tuesday, April 20th, 2010

Who is Halsey Minor? He happens to top the California Franchise Tax Board’s semi-annual listing of tax delinquents. I may not have heard of Mr. Minor, but many others have; he is the founder of CNET. Mr. Minor told that the tax debt owed to California–$13,120,479.39–is accurate. Mr. Minor blames Merrill Lynch for his problems. “I am not sure how many people have made $130 million over the last several years. It also proves the difficulties Merrill has created, all of which will be tried in front of a jury in California [on] January 25, 2011.”

There are other interesting names on the list. Coming in at #6 with a tax debt of $5,184,641.51 is former major league baseball player Kevin Mitchell. And then well down the list with a tax debt of $493,144.68 is Pamela Anderson. Yes, that Pamela Anderson.

I must report, though, that OJ Simpson is no longer on the list. Apparently, being in prison in Nevada is a good excuse for not paying the FTB.

It took a tax debt of $290,964.78 to make the list.

Annualization Method for Estimated Taxes in California

Sunday, February 21st, 2010

Many taxpayers, especially those with income streams that are inconsistent, use the Annualization Method to make their estimated tax payments. For federal tax purposes, it’s relatively easy. You take the year-to-date income through the period end (March 31st, May 31st, August 31st, or December 31st), annualize it, compute the annual tax, and then pro-rate it for the tax payment that’s due. But how do you work the Annuzliation Method in California, when the first payment (due April 15th) is for 30% of the tax?

The Franchise Tax Board has come out with an article with the answer.
For those who do not use the Annualization Method, 30% of the tax is due on April 15th, 40% is due on June 15th, nothing is due on September 15th, and 30% is due on January 18, 2011. For taxpayers using the Annualization Method, 27% is due on April 15th, 63% is due on June 15th, 63% is due on September 15th, and 90% is due on January 18, 2011.

The Franchise Tax Board also had good news for taxpayers who made estimated payments using the old 25% rule for the first three estimated payments of 2009.

The good news is R&TC Section 19136(g) prevents the imposition of a penalty for underpayment of estimated tax if the underpayment was created or increased by a law chaptered during and operative for the same taxable year. Since the amendments to R&TC Section 19136.1 by ABX4 17 with respect to the percentages for the annualized method were enacted in 2009 and operative for the 2009 taxable year, no penalty for underpayment of estimated tax can be imposed if the underpayment was created or increased by the changes made by ABX4 17…If an underpayment of estimated tax exists due to the changes to the annualized percentages for the first three estimated tax payments, you may request a waiver or reduction of the underpayment of estimated tax penalty by completing Part I of Form 5805.

Do note that this exception, in existence for 2009, will not work for 2010. The law changing California’s estimated tax payments to 30%-40%-0%-30% passed in 2009. At the rate the Bronze Golden State is going, we’ll soon be required to pay 100% of our estimated tax in April.